Using appropriate illustrations and practical examples, compare and contrast profit

maximization in perfect competition and monopoly.

There is a variety of goods and services that are produced and retailed by
firms at a given price on the market. These goods and services are supplied
either by many firms or by one firm only. In the case of goods and services
that have several suppliers, there is competition to sell a maximum of there
goods at a price decided not by the seller but mostly by the buyer himself.
There are different degrees of competition – Imperfect competition where
there is one giant firm dominating other small firms that produce and sell
same product and Perfect competition where there are several firms but no
one is big enough to exercise a commanding lead, producing same goods. It
is obvious that all firms produce and sell goods so as to make profits at the
end of the day. Let us see how Profit maximization takes place in perfect
competition.

In this case let us take for example the selling of coffee on the market.
Coffee has substitutes and has many brands as well. It is distributed around
the world by various firms. If the supplier of coffee aims at maximizing profits
in perfect completion, he needs to produce on a higher scale by keeping cost
of production low. The selling price of coffee is kept above the cost of
production also. This type of profit maximization is defined as marginal
revenue equaling marginal costs. Refer to table 1 below as example of cost
of producing coffee by a firm in the competitive market.

Output, Total Cost, TC Average cost, AC Marginal Cost, MC

Q
1 100 100 -
2 150 75 50
3 180 60 20
4 200 50 20
5 230 46 30
6 270 54 40
7 325 46.4 55

8
 8 400 50 75
9 495 55 95
10 600 60 105

Note:

AC is calculated by dividing TC by Q.

MC is calculated by the difference between each TC of each output (e.g 160-100 for output 1 and
2 MC is 60).

Now, let us assume that the price of coffee on the world market is stable and given as 60. We see
that average cost is less than marginal cost at output 7 only and at the same time it is nearest to
the world market price, that is 60. This means that the profit maximizing output is 7. If he
increases production to 8 units, then he will incur loss. Refer to table 2 below for Total, Average
and Marginal Revenue.

Output, Total Revenue, TR Average Revenue/Price, Marginal Revenue,

Q AR MR
1 60 60 -
2 120 60 60
3 180 60 60
4 240 60 60
5 300 60 60
6 360 60 60
7 420 60 60
8 480 60 60
9 540 60 60
10 600 60 60

This analysis can be summarized in a graphical representation as per figure 1.

Now, let us see the profit maximization in a monopoly.

Monopoly is the exact contrary of competition. There is a sole distributor and manufacturer as
well. The monopoly firm sets the price of the product by deciding what quantity he will produce.
If supply of the product is low the prices will go up automatically. In other case, if the supply is
high then the price will definitely go down. Thus, Marginal Revenue in a monopolistic market

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should be less than the average. Let us take a look at table below for a monopolistic firm
supplying coffee.

Output, Total Average Marginal Price/Average Total Marginal Total

Q Cost, Cost, AC Cost, MC Revenue, AR revenue, Revenue, Profit,
TC TR = AR MR TP =
xQ TR-TC
1 100 100 135 135 35
2 150 75 50 120 240 105 (for 90
1 and
2)
3 180 60 30 105 315 75 (for 135
2and 3)
4 200 50 20 90 360 45 (for 160
3 and
4)
5 230 46 30 75 375 15 (for 145
4 and
5)
6 270 45 40 60 360 -15 (for 90
5 and
6)
7 322 46 52 45 315 -45 (for -7
6 and
7)
8 400 50 78 30 240 -75 (for -160
7 and
8)
9 495 55 95 15 135 -105 -360
(for 8
and 9)
10 600 60 105 0 0 -135 -600
(for 9
and 10)

From the graphical representation of figure 2, we can see that the MR shows the increase in Total
revenue through the sale of one extra unit and it falls faster than the Average revenue. A profit
seeking firm will not increase its production to the point where the last good sold brings less
revenue than its cost of producing it. It will operate to the point where MC is equal to MR. In this
case, the firm will produce up to 4 units. The firm is in equilibrium at 4 units of output where the
price or Average Revenue is 90 and AC is 50. The total profit, TP will thus be (90-50) x 4 = 160.

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Thus, we can say that the profit maximization in both perfect competition and monopoly is
different, as shown in both cases.

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